Companies Find a Faster IPO Turnaround Doesn't Hurt

Shares of Firms That Used New Rules Performed Similarly

By

Telis Demos

Updated Sept. 29, 2013 10:00 p.m. ET

A week, in the words of the late British Prime Minister Harold Wilson, is a long time in politics. But how long are three weeks in the stock market?

Investors are starting to find out. New rules on initial public offerings allow smaller companies to file their listing documents privately with regulators and then reveal them as little as three weeks before the company proposes a price for its shares. Traditionally, investors have had months to pore over such documents.

So far, giving investors less time to look at the fine print doesn't seem to have hurt companies. Shares of companies that have taken full advantage of the new rules have performed similarly to others that could have but didn't, and some have done much better.

Twitter Inc.—one of the most anticipated IPOs of the next few months—qualifies for the new treatment. The social network has said it has filed secretly, as it is permitted to do under the Jumpstart Our Business Startups Act, which applies to companies with less than $1 billion in annual revenue. It isn't clear if Twitter will give investors more time to see its filing than the minimum the law requires.

Twitter is expected to make its filing public as soon as this week, according to people familiar with the discussions. It isn't yet clear whether it will launch the offering as soon as possible, but one person said that the company was moving with all due speed. The timing of the public filing was earlier reported by Quartz, a news website.

Under the JOBS Act, which became law in April 2012, a company can send a draft of its IPO prospectus to the Securities and Exchange Commission privately. So far this year, 110 of all 151 U.S.-listed IPOs have started with a confidential filing, according to Renaissance Capital LLC, an IPO research and investment firm.

Some investors say three weeks is plenty of time to digest the filings.

ENLARGE

Twitter filed documents privately.
Bloomberg News

"You see a filing, go through the financials and decide whether to spend more time on it. If you focus on it, three weeks is plenty of time," said Dan Chace, a portfolio manager at Wasatch Funds whose fund invests in very small companies, including occasional IPOs.

Since April 2012, the median performance of a company with under $1 billion in revenue that had IPO documents publicly on file for fewer than 25 days is an increase of 29% since its debut, according to Dealogic. (This excludes special-purpose acquisition companies.) JOBS Act-eligible companies with IPO documents on file publicly for longer than 25 days haven't done as well, with a median gain of 24%. Some companies say they see little need to have their financials public longer than necessary, noting that the sunshine enables competitors to pick out scary-sounding risk factors and cite them to customers.

Many recent technology IPOs that have soared after their debuts made their financials public for the minimum period necessary, including e-commerce company RetailMeNot Inc. and online real-estate company Trulia Inc.

Sean Aggarwal, chief financial officer of Trulia, said that confidential filing didn't seem to be a hindrance for long-term investors. "I'd love to see the SEC make that available for all IPO filings," and not just for companies with under $1 billion in revenues, he said. The company's stock is up 184% since its debut last September.

With confidential filing, any concerns regulators have with the document can be worked out beyond public view. Eventually, all drafts of the prospectus are revealed when the documents are publicly filed; correspondence with the SEC is published weeks after the offering, as it is with nonconfidentially filed offerings.

The company only has to file a public prospectus 21 days before it proposes a price range, when it begins its "roadshow" and formally pitches its stock to investors. The purpose of the provision is to make it easier for companies to consider going public without scrutiny of their financials by competitors and the media. If they choose not to do an IPO, they can quietly withdraw or postpone, the thinking goes.

Some experts and analysts argue that Twitter, because of the wide interest it will command from both institutional and retail investors, should give people more than 21 days to consider its financial statements.

"The information void is potentially being filled with assumptions and rumor—and anything that falls short of expectations could have a negative impact on investor evaluations once the details become public," said Scott Vanlandingham, a principal at McGladrey LLP, a consulting and accounting firm, in an email.

"Even for professionals, unless you're narrowly focused, three weeks is not a lot of time. If you're a retail investor and you have a day job, God help you," said Rett Wallace of Triton Research LLC, a private-company research firm, referring to the big rise some IPOs enjoy on their first day of trading.

A spokesman for Twitter declined to comment.

Internet companies in the past have been the subject of intense scrutiny as soon as they filed their financial statements. Groupon Inc., which didn't have private filing available to it in 2011, made changes to the accounting measures it used in its initial filings amid criticism.

Since the JOBS Act was passed, a few eligible companies have skipped the secret process.

Steven St. Peter, chief executive of Aratana Therapeutics Inc., which turns human medicine into drugs for pets, said that his company didn't file privately ahead of its June IPO this year because it wanted to give investors more than three weeks to learn about what it does.

The company initially struggled to go public, delaying an IPO planned for mid-June, then relaunching it at the end of the month after cutting the price in half. The shares have risen well beyond their initial price range, jumping 176% since the IPO. "Our filing was intended to articulate our strategy. We wanted to educate the market about the opportunity and disclose the risks that go along with that," he said.

Some companies have taken only limited advantage of confidential filing, choosing to initially file secretly but make the document public more than 21 days before the official offering.

Covisint Corp., which delivers business software via the web, made its first public filing in May, after an initial confidential filing last December. Only this month did Covisint set a price and complete its IPO, which jumped 24% in first-day trading.

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